Referring to the new set of norms introduced by the central bank at its October credit and monetary policy, Ahluwalia said, "The Reserve Bank and the finance ministry must work out a time frame for the transition period. The name of the game is: Will the banks be able to live up to the new norms?"

Later talking at the sidelines of the conference, the former finance secretary made a strong pitch for the dilution of the government's stake in the state-run banks. "The government should not keep on pumping funds to capitalise banks. It puts pressure on the budget. The government needs tospend on the social sector, health, education and infrastructure. It cannot afford to spend so much on re-capitalising banks," Ahluwalia said.

Over the past five years, the centre has pumped in over Rs 20,000 crore towards re-capitalising weak public sector banks. The second Narasimham committee on banking sector reforms has called for a dilution of the government's stake in public sector banks from 51 per cent to 33 per cent. "I don't see any reason why the government should not bring down its stake. After all, it can exercise control even after paring its stake," he said. The Indian banks must access the capital market to shore up their capital-adequacy ratios, he said.

An unsound banking system, according to him, puts pressure on the fiscal situation. "Even when the fiscal deficit is not in very good shape and if the banking system is not good, the government comes forward as it cannot let banks go bust. In the process, the burden on the budget increases," the planning commission member said.

Whileurging bankers to live up to international standards, Ahluwalia said the practice of projecting gross non-performing assets did not reveal the financial strength of the system. "The Indian banks' NPA level is not very high. Moreover, unlike global banks the net NPA of Indian banks is not calculated as a percentage of total assets. If you take into account banks' exposure to risk-free government papers, the net NPA level will certainly come down from the current 8 per cent to 5 per cent. The correction needs to be made immediately," he said.

Ahluwalia, however, was quick to add that even then the NPA level is high, and that it must come down to 2-3 per cent. He also urged banks to adopt sophisticated credit-appraisal system. "Once you are integrated with the world economy, you must know how to withstand the pressure of interest rate and exchange rate volatility. And this is only possible when the credit-appraisal system is sophisticated," he said.